Ministers Admit Divergent Euro Zone Fears

European Union finance ministers who met in Luxembourg on Friday expressed concerns and admitted that diverging growth rates in the euro zone were giving them a growing headache and added pressure on those already struggling to cope with the strength of the euro and high oil prices.

Luxembourg Prime Minister Jean-Claude Juncker, whose country currently holds the European Union (EU) presidency, said euro zone finance ministers voiced "serious" concerns about recent evidence suggesting that some of the euro zone's biggest economies are on different growth paths.

While acknowledging that some differences in economic performances was "natural", Juncker said: "There are divergences that are starting to seriously concern us. These are substantial divergences in growth, these are divergences in the elements making up growth, these are divergences affecting competitiveness of the national economies of the euro zone," added Juncker, who hosted the meeting.

Germany on the mend, Italy looking broke

His comments came a day after the release of official data showing the German economy, which until recently was one of the euro zone's weakest, now enjoying rude health while the Italian economy slumped into recession.

The German data showed that Europe's largest economy clocked its fastest growth for four years in the first three months of 2005 owing to robust exports.

That contrasted sharply with figures released in Italy, revealing that the Italian economy entered a recession in the first quarter with the worst quarterly performance in six years.

The data were included in an initial estimate from the EU statistics agency Eurostat that the 12-state euro zone economy grew 0.5 percent in the first quarter from the last three months of 2004, which was slightly better than expected.

Ups and downs across the euro zone

But the divergence in growth rates appears not to be limited only to Germany and Italy. The EU figures showed Belgian growth stalled and the Dutch economy shrinking slightly in the first quarter while EU economics commissioner Joaquin Almunia said he expected "pretty positive" growth from France when it releases first-quarter statistics.

The figures have left policymakers dazed and confused. "The bottom line would have to be described as mixed feelings," Almunia told a news conference. "Some of this data gives us reason to feel optimistic, but that has to be tempered by a rather less optimistic view."

Juncker said that the EU's executive commission was going to look more closely into the divergent trends within the euro zone although he insisted that what was really needed was structural reforms.

Although the divergent growth trends were in part due to technical and calendar-related factors, recent studies by the European Commission's economic directorate suggest that there are deeper, structural changes causing the differing growth rates.

Business driving or stalling the economies

One study released earlier this week said that Italy's export-oriented economy was suffering from weak growth because it had failed to build up internationally competitive, value-added industries. "Italy's product specialisation, unlike that of countries such as Germany or France, has not significantly changed over past decades in reaction to global economic developments," the study found.

Meanwhile, another recent study from the commission found that Germany's export industries are becoming increasingly competitive.

More painful reforms needed throughout Europe?

Analysing the recent euro zone growth data, Goldman Sachs economist Javier Perez de Azpillaga economist drew similar conclusions and said that painful reforms were the answer politicians needed to give.

"The German export performance highlights Italy's competitive shortcomings against countries both in the euro area and outside it. Unfortunately, it seems that rising unemployment and rising social discontent may be needed to prompt political and social leaders to implement the necessary reforms," he said.